March 1961

Federal Reserve Operations in

Perspective
ALMOST A YEAR AGO, in the earlier part
of 1960, the Federal Reserve System began
to lean against the incipient down-wind of
what has come increasingly to be classified
as the fourth cyclical decline of the postwar era.
Already, as the winter faded, and with
it the inflationary psychology that had characterized the economic situation carrying
over from 1959, bank reserve positions
which govern the ability of the banking
system to expand loanshad been made
less dependent on borrowed funds.
Then, with the spring in progress, the
Federal Reserve moved further: first, to
promote still greater ease in bank reserve
positions; and next, beginning in May, to
provide additional reserves to induce a moderate expansion in bank credit and the
money supply.
In this period in particular, new supplies
of reserve funds were injected into the economy by means of open market operations.
The first effect was to enable member banks
to reduce appreciably their reliance on borrowed reserves. After this was accomplished,
the added reserves went to support the potential for bank credit expansion. In these
open market operations, from late March
through July, the Federal Reserve paid out
about $1.3 billion, net, for the Government securities it was buying on an increasing scale. After cushioning the reserve impact of a $500 million increase of currency
in circulation and gold outflow, this sum
NOTE.Statement of William McC. Martin, Jr.,
Chairman, Board of Governors of the Federal Reserve System, before the Joint Economic Committee,
March 7, 1961.

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made possible a $300 million reduction in

member bank borrowing and a $500 million increase in member bank reserves.
But other means available for the execution of System policy were used as well,
particularly after mid-1960.
In early June, and again in August, discount rates were reduced, by Vi percentage point each time. These reductions lowered the cost of member bank borrowings
from the Federal Reserve Banks to 3 per
cent from the 4 per cent level that had prevailed before.
In August also, and again in November,
by actions taken in implementation of a
1959 Act of Congress, nearly $2 billion
previously tied up in vault cash of member
banks was released to assure ample coverage of heavy borrowing needs for the fall
and pre-Christmas seasons. An additional
$700 million was provided by further net
purchases of U. S. Government securities.
After midyear, the task of monetary policy was complicated by an outflow of gold
exceeding $1.5 billion. Thus, a substantial
part of the reserve funds provided by the
System in this part of the year went to offset the effect of this outflow on member
bank reserves.
Taking the year 1960 as a whole, the
change in bank reserve positions was dramatic. From net borrowings from the Federal Reserve of $425 million in December
1959, member banks as a whole moved by
December 1960 to a surplus reserve of $650
million. The total turnaround exceeded a
billion dollars.
Nevertheless, the money supply showed

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a stubborn downtrend until mid-1960. In

the spring, bank credit seemed to respond
less promptly to easier reserve conditions
than in comparable periods in the past.
After May, however, the seasonally adjusted money supply did begin to reflect our
actions. In the second half of the year the
money supply rose at an annual rate of about
1.5 per cent. By year-end it had risen to
$140.5 billion, just below the end-of-1959
level. The money supply has expanded further in January and February of this year.
Indeed, the annual rate of increase calculated from the performance of these two
months was in the neighborhood of 4 per
cent and the total money supply is now
above year-ago levels.
The savings and time deposits of banks
continued to grow in 1960 and after midyear the pace of growth was unusually
rapid. This increase in time deposits permitted an increase of total bank loans and
investments for the year as a whole by $8.4
billion. That was twice as much as the year
before.
Total credit in the economy in 1960 expanded by some $37 billion. That figure
was about two-fifths less than the record expansion of $61.5 billion in 1959, on which
I reported to you a year ago, and more
nearly in line with total credit extensions of
other recent years. The smaller growth in
1960 was attributable to reduced pressure
of borrowing demand, especially on the part
of the Federal Government.
The most significant thing about the Federal Reserve's operations in 1960 is not that
they were extraordinary but, instead, that
they were typical of Federal Reserve operations under the flexible monetary policy
that has been in effect now for a full decade.
That policy, as I have capsuled it before
in the shortest and simplest description I

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273

have been able to devise, is one of leaning

against the winds of inflation and deflation
alikeand with equal vigor.
It is, in my opinion, the policy that the
Federal Reserve must continue to follow if
it is to contribute to the provision of conditions conducive to a productive, actively
employed, growing economy with relatively
stable prices.
Yet, while the necessity for adhering to
that policy remains as great as ever, the
difficulty of executing it has become vastly
greater. This is so because of economic and
financial crosswinds that have been developing for years and, since mid-1960, have
been gaining in force.
The problem, it now appears, and it is
by no means a problem for monetary policy alone, is to lean against crosswinds
simultaneously. I do not know how effectively this can be done. I do know, however, that it will not be easyjust as the
problems of monetary policy and of other
financial policy have never been easy.
To put in perspective the problems that
the Federal Reserve faces todayand how
it is adapting to these problemslet me
briefly review monetary policy over the past
20 years.
Immediately upon the United States' entry into World War II in December 1941,
the Board of Governors announced that the
Federal Reserve was prepared
(1) "To use its powers to assure that
an ample supply of funds is available at
all times for the war effort, and
(2) "To exert its influence toward
maintaining conditions in the U. S. Government security market that are satisfactory from the standpoint of the Government's requirements."
Making good on its words, the Federal
Reserve saw to it that the banking system

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FEDERAL RESERVE BULLETIN MARCH 1961

was supplied with ample lendable reserves

to provide the Government with all the warfinancing funds that it could not raise
through taxation and through borrowing
people's savings.
It did so by buying outstanding Government securities on a huge scale. The Federal Reserve's payments for these securities
wound up in bank reserves. In turn, the
banking system used these additional reserves to purchase new securities that the
Treasury was issuing to obtain further funds
to finance the war effort.
To keep the process going, the Federal
Reserve in effect maintained a standing offer to buy Government securities in unlimited amount at relatively fixed prices, set
high enough to assure that their interest
rates or yields would be pegged at predetermined low levels. When no one else
would accept those yields and pay those
prices, the Federal Reserve did so. And in
so doing, it helped to finance the war.
The process was successful for its emergency purpose. But the procedure of pegging Government securities at high prices
and low yields entailed a price of its own
that the economythe people and the Government alikewould later have to pay.
The results were two-fold:
(1) During wartime, money was created
rapidly and continually, in effect setting a
time bomb for an ultimate inflationary explosioneven though the immediate inflationary consequences were held more or less
in check by a system of direct controls over
prices, wages, materials, manpower, and
consumer goods.
(2) The market for Government securities became artificial. The price risks normally borne by participants in that market
were eliminated: bonds not payable for 20
years or more became the equivalent of in-

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terest-bearing cash since they could be

turned into cash immediately at par value
or betterat the option of the owners, at
any time.
The pegging of yields and prices of Government securities was continued for some
time after the war to provide a gradual transition to a market freely responsive to the
changing demand for and supply of securities. A gradual transition was especially important because capital values generally had
become moored to the artificial yields and
prices in the pegged market for Government securities.
By 1950, however, the need to end the
dependence of the Treasury and the Government securities market upon money creation by the Federal Reserve, and to halt
the inevitable inflationary consequences, had
become clear to many observers. The outbreak of hostilities in Korea and the inflationary crisis that accompanied it brought
the matter to a head.
Understanding of the problem was enhanced by an exhaustive investigation conducted by a Special Subcommittee of the
Joint Congressional Committee on the Economic Report, under the chairmanship of
Senator Paul Douglas. In its report in January 1950, the Congressional Subcommittee
said means must be found for discontinuing
the pegging of the Government securities
marketif financial stability and effective
control over the creation of new money
were to become possible in the decade of
the 1950's.
After considerable negotiation, the Treasury and the Federal Reserve System reached
an Accord, jointly announced by them on
March 4, 1951, that served to recognize and
reaffirm that:
(1) To serve the public welfare, Federal Reserve policy must be directed toward

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FEDERAL RESERVE OPERATIONS IN PERSPECTIVE

maintaining monetary conditions appropriate for the economy as a whole, rather than
toward special treatment for the Treasury
and the Government as if their interests
could differ properly from those of the people as a whole.
(2) Likewise to serve the public welfare,
the Treasury's borrowing operations in management of the Government's debt must be
reasonably calculated to induce loans to the
Government in an economic system where
no one can be compelled to lend his money
at interest rates that he would be unwilling
to accept voluntarily.
Thus, the Accord reestablished the complementary operation of monetary and debt
management policies: by the Federal Reserve, to regulate the availability, supply,
and cost of money with a view to its economic consequences; by the Treasury, to
finance the Government's needs in the traditional context of a competitive market.
To provide for the gradual withdrawal
of the pegs that had fixed market prices and
yields, several procedures were instituted
immediately and carried out over the next
weeks and months.
That's much easier to say now than it
was to do then. For this was the problem:
(1) Hanging over the market like a
storm cloud were two issues of the longest
term, 2V per cent bonds, outstanding in
the total amount of $19.7 billion. Their
prices had been propped around 100%
throughout January and February 1951, by
price-supporting purchases.
(2) Although these bonds were not due
for redemption until 1967-72, they were instantly saleable in markets. In fact, many
of their holders were exercising their right
to selland selling in large amountsso as
to reinvest the proceeds in private securities
yielding a higher return.

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275

(3) Even a lowering of the price props,

much less a complete withdrawal, might
very easily cause holders of these instantly
marketable securities to unload them on the
market so heavily as to cause a collapse in
the market that might, in turn, provoke a
sharp economic setback.
Since the primary necessity was to safeguard the market and the economy against
that danger, these were the first steps taken
under the Accord:
Holders of the overhanging, fully marketable 2Vi per cent bonds of 1967-72 were
offered an opportunity to exchange them, in
early April 1951, for 2% per cent bonds of
1975-80 that could not be sold at all although they could, at the holder's option,
be converted into 1 Vi per cent notes carrying sale privileges.
While the exchange was being effected,
support buying was continued by the Federal Reserve and the Treasury, but at declining prices: from January through April,
net purchases by the Federal Reserve totaled
approximately $1.4 billion. When the exchange was completed, the offer of nonmarketable bonds had been accepted on a scale
sufficient to remove from the market $13.6
billion of the overhanging marketable bonds,
including $5.6 billion that had been held
by the Federal Reserve and the Treasury.
This exchange paved the way for discontinuance of Federal Reserve purchases of
Government bonds in support of their prices.
In May and June net purchases by the
Federal Reserve of long-term bonds dropped
off to $250 million, but that was enough to
assure against development of disorderly
conditions in the market. After that the
Federal Reserve ceased buying almost altogether; purchases during the entire last half
of 1951 totaled only $20 million. And
prices, which had been supported around

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FEDERAL RESERVE BULLETIN MARCH 1961

100% at the start of the year, fluctuated

around 97 during the last half of the year
when the bond market was on its own.
As the years 1951 and 1952 progressed,
however, market developments demonstrated a disturbing skepticism among investors that the Federal Reserve was in fact
abstaining (or would continue to abstain)
from attempting to maintain certain predetermined interest rates, regardless of the
over-all state of the demand for and the
supply of savings. This skepticism was fed
by market observation that the System engaged in purchases of securities involved in
Treasury financings around the periods of
such financings.
After very careful study of the functioning of the Government securities market and
of the relation of Federal Reserve monetary
operations to the market, the System decided that it would limit its open market
transactions to short-term securities, usually
those of the very shortest term: Treasury
bills. It also decided to refrain from operations in securities involved in Treasury financings. In taking these steps, the Federal
Reserve objective was to convince the market that it was not undertaking to peg interest ratesand most certainly not those
on intermediate- and long-term securities.
Accordingly, to minimize market uncertainty as to possible Federal Reserve operations affecting market rates, and thereby to
aid the effective competitive functioning of
the market, the System announcd in April
1953 that until further notice, unless disorderly conditions arose in the market, it
would operate only in the short-term area,
where its operations would have the least
market impact.
I think I should point out here, in fairness to my colleagues on the Federal Open
Market Committee, that in this decision to

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limit our open market operations to the short

end of the market, we were not unanimous
neither then, nor since then.
Indeed, the divergence of views in the
System on this question has been more
marked and more continuous than on any
other that I can recall in my ten years in
the Federal Reserve. That, I think, is readily understandable because the question relates to the techniques of open market operationsa highly technical and involved subjectrather than to general credit policy itself.
In my opinion, it is and always will be
easier to achieve full agreement on what to
do than on how to do it. To me, that explains why the uninterrupted character of
the divergence in the System over operating techniques contrasts sharply with the
rather high degree of agreement we have
had, most of the time, over questions of
general credit policywhether and when
to ease or restrain, and how much. Also,
why it contrasts completely with the undeviating firmness of our opposition, at all
times, to returning to a pegged market.
These matters, however, are too well
known to members of this Committee for
me to labor them further at this point: the
records of your past hearings, as well as our
Annual Reports, contain the views on that
score of several members of the Open Market Committee, including the former and
the present vice chairmen of our Committee, Messrs. Allan Sproul and Alfred Hayes
of the Federal Reserve Bank of New York,
as well as myself as chairman.
In any event, following the 1953 decision
I have describedthe decision to confine
our open market transactions to the shortterm sector of the marketthe emphasis in
Federal Reserve operations continued to be
placed upon providing bank reserves to meet

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FEDERAL RESERVE OPERATIONS IN PERSPECTIVE

the economy's needs rather than to set particular rates of interest. Inevitably, however, interest rate movements, since they reflected basic demand and supply conditions,
continued to be one of many factors considered by the Federal Reserve in making judgments about the need for changes in the reserve base. Conversely, Federal Reserve operations in the market continued, inevitably,
to be an important influence affecting the
general level of market interest rates.
Despite confinement of its operations ordinarily to the short-term area, the Federal
Reserve stood prepared to buy securities
other than Treasury bills should unusual
developments create disorderly conditions in
the Government securities market and thus
in credit markets as a whole. When disorderly conditions seriously threatened as in
late November of 1955 or actually developed as in the summer of 1958, the Federal Reserve bought longer term securities
to maintain or reestablish orderly trading.
Apart from these exceptional and infrequent
circumstances, however, the Federal Reserve maintained its reliance upon operations in Treasury bills without interruption
until 1960. With the introduction of the 6month Treasury bill in 1958 and the 12month Treasury bill in 1959, the System
extended the maturity range of its operations
within the short-term area.
Toward the close of 1959 there were increasing indications, signaled by rapid rises
in market interest rates accompanying a
mounting intensity of borrowing demands,
that conditions bordering on the disorderly
might be encountered increasingly in the future and that there might be more occasions than in the past for corrective operations by the Federal Reserve in maturities
beyond the range of Treasury bills.
After the middle of 1960, another con-

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277

sideration pointing to a possible need for

Federal Reserve operations in longer term
securities arose from the convergence of two
important developments:
(1) On the domestic front, a decline in
key sectors of business activity, accompanied
by gradual rise in unemployment, suggested
that the economy might be moving downward on a broad pattern of recession.
(2) In the area of international financial accounts, a big deficit in the U. S. balance of payments was made larger by a substantial outflow of short-term funds from the
United States to foreign money centers,
partly in response to higher interest rates
abroad.
As I stated earlier, the Federal Reserve
had been making bank reserves available to
ease the credit situation since the winter of
1960. Thus, it had been a contributing
influence in the decline in market interest
rates to mid-1960. In the light of the domestic business and employment situation
and the balance-of-international-payments
deficit, this decline presented us with a
dilemma in the latter part of 1960.
If the Federal Reserve continued to supply reserves by buying only Treasury bills,
the direct impact of its purchases might
drive the rate on those securities so low as
to encourage a further outflow of funds to
foreign markets and thus aggravate the
already serious balance-of-payments deficit.
If, on the other hand, the Federal Reserve
refrained from further action to supply funds
for bank reserves because of the balanceof-payments situation, it would be unable to
make its maximum contribution toward
counteracting decline in domestic economic
activity through the stimulative influence of
credit ease.
Thus, in an effort to expand reserves and
yet to minimize the repercussions on the bal-

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FEDERAL RESERVE BULLETIN MARCH 1961

ance of payments, the Federal Reserve began, in late October 1960, to provide some
of the additional reserves needed by buying certificates, notes, and bonds maturing
within 15 months. Since that time, the System has bought and sold such securities, in
addition to bills, on a number of occasions,
duly reporting these portfolio changes in a
public statement issued every Thursday.
Now here let me note something about
the decline in interest rates that took place
in 1960. During the first eight months
market rates on Treasury bills and intermediate-term issues fell much more sharply
than on bonds, as is usual in a period of
declining rates.
After late summer, however, the differential between short- and long-term rates
ceased to widen, and the average level of
rates itself remained relatively unchanged.
The increased net outflow of domestic and
foreign capital from the United States in the
second half of the year, in response partly
to the attraction of higher interest rates and
potential capital gains abroad, was itself a
factor in keeping interest rates in the United
States from declining, because it reduced the
supply of funds available here.
It was in the latter part of 1960, as I have
noted, that Federal Reserve operations were
directed more and more toward reducing
the direct impact on Treasury bill yields
of Federal Reserve purchases. Thus, when
the System was providing for the large seasonal expansion in credit needs that occurs
in the fall and pre-Christmas seasons, it
did not rely solely on further open market
purchases but took actions that made vault
cash holdings of banks fully available for
meeting reserve requirements. And on
the occasions when the System did engage
in open market operations, it often conducted these operations in short-term Gov-

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ernment securities other than Treasury bills.

With the domestic economy and the balance of payments continuing to pose conflicting problems, open market transactions
in securities other than Treasury bills are
continuing. Beginning on February 20, as
we stated in an announcement issued on that
date, the Federal Reserve has engaged in
purchase of securities having maturities beyond the short-term area, putting to practical test some matters on which it has been
possible in recent years only to theorize.1
There is still a question as to the possibility of bringing about a meaningful decline in longer term rates through purchases
of longer term securities without, at the same
time, causing a shift in market demand toward short-term securities that would also
press down levels of short-term rates.
On the other hand, it seems to me, few
could question the desirability of the result,
if it can be attained, as a means of keeping
financial incentives attuned to the current
needs of our domestic economy and our international financial position.
We will want to observe closely, of course,
the effect of this change in operating techniques on the market and its capacity to fulfill its role in transferring a large volume of
securities among our various financial institutions to facilitate their responses to shifts
in the supply of savings and the demands of
borrowers.
In our country the Government cannot
force anyone to lend his money at rates he
is unwilling to acceptany more than it can
force him to spend his money at prices he
is unwilling to pay. In the securities market, investors always have the alternative of
investing their funds in short-term securities
if they feel that yields in the longer term
1
For text of this announcement, see BULLETIN for
February, 1961, p. 165.

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FEDERAL RESERVE OPERATIONS IN PERSPECTIVE

area are unfavorable. Therefore, in the outcome of this test much will depend on the
reactions of investors.
As I have said many times in the past,
before this Committee and others, I am in
favor of interest rates being as low as possible without stimulating inflation, because
low rates can help to foster capital expenditures that, in turn, promote economic
growth.
Yet, as I assume we can all agree, interest rates cannot go to and long remain
below the point at which they will attract
a sufficient volume of voluntary saving to
finance current investment at a relatively
stable price level. At least we can agree, I
think, that interest rates cannot be driven
and long held below that point without resort to outright creation of money on such
a scale as to invite inflation, serious social
inequity, severe economic setback, and, under present conditions, an outflow of funds
to other countries and consequent drains on
this country's gold reserves.
I do not believe anyone expects the Federal Reserve to engage in operations that
will promote a resurgence of inflation in
the future. In combating inflation in the
past, undue reliance has perhaps been placed
on monetary policy. I can readily agree
with those who would have fiscal policy,
with all of its powerful force, carry a greater
responsibility for combating inflation, and I
am encouraged to think that this may be
likely in the future. If we do this, we should
more nearly achieve our over-all stabilization goals, along with some reduction in
the range of interest rate fluctuation.
That, however, is a matter for another
day. Today, we have in this country a serious problem to contend with in the erratic
but persistent rise in unemployment that has
taken place since mid-1960. In January the

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279

seasonally adjusted rate of unemployment

was 6.6 per cent of the labor force, the highest percentage since 1958; the actual number of persons unemployed was 5.4 million,
the highest number since the days before
World War II.
The contracyclical operations that the
Federal Reserve is and has been conducting,
despite the handicaps imposed by the balance-of-international-payments difficulties
that we hope will be overcome, should be
helpful, as they have been in the past, in
combating that part of unemployment
caused by general economic decline. Certainly those of us in the Federal Reserve
mean them to be.
While the unemployment that arises from
cyclical causes should prove only temporary, there are, however, forces at work that
have produced another, structural type of
unemployment that is worse, in that it already has proved to be indefinitely persistenteven in periods of unprecedented general prosperity.
The problem of structural unemployment
is manifest in the higher total of those left
unemployed after each wave of the three
most recent business cycles, and in the idleness of many West Virginia coal miners,
Eastern and Midwestern steel and auto workers, West Coast aircraft workers, and like
groups, in good times as well as bad.
To have important effect, attempts to reduce structural unemployment by massive
monetary and fiscal stimulation of over-all
demands probably would have to be carried
to such lengths as to create serious new problems of inflationary characterat a time
when consumer prices already are at a record high.
Actions effective against structural unemployment and free of harmful side effects
therefore need to be specific actions that

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FEDERAL RESERVE BULLETIN MARCH 1961

take into account the who, the where, and

the why of unemployment and, accordingly,
go to the core of the particular problem.
Analysis of current unemployment shows
that, in brief:
(1) The lines of work in which job opportunities have been declining most pronouncedly for some years are farming, mining, transportation, and the blue collar
crafts and trades in manufacturing industries.
(2) The workers hardest hit have been
the semiskilled and the unskilled (along with
inexperienced youths newly entering the
labor market). These workers have accounted for a significant part of the increase
in the level and duration of unemployment.
Among white collar groups, employment has
continued to increase and unemployment
has shown little change even in times of
cyclical downturn.
(3) The areas hardest hit have been, primarily, individual areas dependent upon a
single industry, and cities in which such industries as autos, steel, and electrical equipment were heavily concentrated.
Actions best suited to helping these groups
would appear to include more training and
retraining to develop skills needed in expanding industries; provision of more and better
information about job opportunities for various skills in various local labor markets;
tax programs to stimulate investment that
will expand work opportunities; revision of
pension and benefit plans to eliminate penalties on employees moving to new jobs;
reduction of impediments to entry into jobs,
and so on. Measures to alleviate distress
and hardship are, of course, imperative at
all times.
In some of the instances cited, the primary obligation of the Government will be
leadership, rather than action, for obviously

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a major responsibility and role in efforts to

overcome unemployment, both cyclical and
structural, rests upon management and labor.
For our part we in the Federal Reserve
intend to do our share in combating the
cyclical causes of unemployment, as effectively as we can, and in fostering the financial conditions favorable to growth in new
job opportunities.
Meanwhile there is, I think, need on the
part of all of us to recognize that the world
in which we live today is not only a world
that has changed greatly in recent years,
but also a world that even now is in a period of further transition.
In economics and finance, no less than in
other relationships, the lives of nations and
peoples throughout the earth have been
made more closely interlinked by developments that have progressed since the beginning of World War IIinterlinked at such
speed, in fact, as to outstrip recognition.
Today, the condition of our export trade,
from which a very large number of Americans derive their livelihood, depends not
only upon keeping competitive the costs and
prices of the goods we produce for sale
abroad, but also upon the prosperity or lack
of it in the countries that want to buy our
goods.
Whether our Government's budget is balanced or not, a factor that greatly affects
our economic and financial condition, depends not only upon our own decisions respecting expenditures and taxes, but also
upon decisions by governments abroad as to
how far they will share the costs of mutual
defense and of programs to aid underdeveloped nations of the world. The decisions
those governments make affect, in turn, their
budget positions and, through them, economic and financial conditions in their own
countries.

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Every country, of course, will always have

problems of its own that differ from the current problems of other lands. Communist
Russia, for example, gives some signs of
worry over a problem old and familiar to
us and to them: The danger of economically
destructive inflation. The New York Times
of January 30 reported that Premier Khrushchev, in a recent public speech, had
pointed to precisely that danger, noting that
"the purchasing power in the hands of the
Soviet people might exceed the value of the
goods available for them to buy."
In Brazil a new administration is seeking
means to cope with an inflation that already
has exacted an enormous price in suffering
inflicted upon her people by soaring increases in the cost of living.
In Belgium a program of austerity, to
bring about adjustments made necessary by
the loss of the Congo, provoked riots that
recently made headlines across the United
States.
In the free world the United States has
not been alone in finding that its domestic
situation and balance-of-payments position
seemed to call for conflicting actions, thus
presenting monetary and fiscal policy makers some complicating crosscurrents.
On January 19, for example, the German
Federal Bank reduced its equivalent of our
discount rate and made known at the time
that it was doing so, despite the high level
of activity in the German economy, for the
purpose of reducing a heavy and troublesome inflow of funds from other countries.
A month earlier the Bank of England had

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281

reduced its bank rate also, to curb a shortterm capital inflow.

Over the last weekend Germany and the
Netherlands up-valued their currencies by
nearly 5 per cent; these actions should help
them to reduce the inflow of volatile capital.
The truth of it is that the major countries
of the Western world, after a long and painful struggle in the wake of World War II
to restore convertibility of their currencies,
and thus to lay the necessary basis for interchanges that can enhance the prosperity
of all, have succeededonly to find that
success, too, brings its problems.
Today, though currency convertibility
does in fact make possible an expanding volume of mutually profitable interchanges
among nations, it also makes possible dangerously large flows of volatile funds among
the nations concernedflows on a scale that
could shake confidence in even the strongest currencies, and cause internal difficulties
in even the strongest economies.
To the cause of these flowsdifferences
in interest rates, conditions of monetary ease
or tightness, budgetary conditions, and developments of any kind that raise questions
and doubts about determination to preserve
the value of a country's currencywe must
remain alert and ready, willing and able to
meet whatever challenge arises.
I, for one, am confident that we will meet
such challenges as may come. Our opportunities for the future are more important
than the problems they bring with them.
Let us seize these opportunities, firmly and
without fear.